The insurance industry calls them "pollution
incidents," and they could mean financial devastation for your
company. The reason? Your property and general liability insurance
policies probably contain a pollution exclusion, which means
"any damage that results from a pollution incident, either
gradual leakage or sudden release of chemicals, or anything between
those extremes, is an excluded cause of loss," says Robert
Rosenfeld, director of the environmental risk management practice
at Canon Insurance Service in Beverly Hills, California.

Of course, any coverage that insurance companies exclude from
one policy, they'll offer in another-hence the introduction of
pollution liability insurance. Rosenfeld says the coverage evolved
soon after the tremendous amount of asbestos litigation in the
1970s. At that time, insurers decided to remove pollution liability
from basic commercial policies and instead offer it separately.
"This meant they could draft contracts that address pollution,
and develop underwriting and rating models that specifically
consider those issues," Rosenfeld says.

The most common use of pollution insurance is to protect buyers,
sellers and lenders in commercial property transactions.
Traditionally, buyers have hired environmental consultants to
conduct site assessments, which usually take three to four weeks to
complete at a typical cost of $3,000 to $5,000. In addition to the
delay involved, another drawback of site assessments is they
express the consultant's opinion of the condition of the site
at the present time and do not consider future discoveries or
incidents.

By contrast, pollution liability insurance protects the
policyholder for the term of the policy (typically up to 10 years
and renewable) for any future incident or discovery of previous
damage. And it's generally less expensive than performing a
site assessment. For example, Rosenfeld says, environmental
liability insurance on a $2 million office building will cost
approximately $2,500 for $1 million of coverage for a five-year
term.

"This is such a useful, flexible, economically advantageous
way to manage environmental risks that I expect that within a few
years it will become as common as title insurance in real estate
transactions," Rosenfeld says. It's also an inexpensive
way to manage pollution liability in other circumstances, he adds.
"Any business whose ongoing operations involve the storage,
handling or transportation of materials that, should they be
released into the environment, would be considered pollutants
should look into this type of coverage."

The insurance protects you when the pollution event occurs on
your property, as well as when you suffer damages because of
pollution at a nearby property. So if your neighbor's chemical
spill migrates to your property, your insurer takes care of the
cleanup and then takes the responsibility for recovering costs from
the party that caused the problem. By the same token, if you cause
damage to other property, your policy pays. Policies also cover
bodily injury caused by pollution and may even be written to cover
loss of business income due to a pollution incident.

Environmental coverage is a relatively new product, so check
with your insurance agent for details on coverage in your area.